Bookmark and Share 13, Options Popularity Increasing

Covered calls are "so popular that 84% of investors who trade options at Charles Schwab & Co. are using covered calls these days."

Wall Street Journal, Jan 2, 2010

Wow! That means 4 out of 5 investors who traded options at Schwab early this year used covered calls. Clearly, covered calls have become a strategy used by many.

Since their introduction in 1973, standardized equity options (puts and calls) have become incredibly popular. In fact, over 37 years the volume has grown at a compound annual growth rate of 25% (even Buffet would approve of that growth rate), and today's average daily volume is over 5x what it was in 2002:

Average Daily Volume Of Options 2002-2010
options
(Note: 2010 is average daily volume through Sep 10, 2010)

Think about it: that's over 15 million puts and calls trading hands every day. Since each represents 100 shares, those options control the equivalent of 1.5 billion shares each day.

So what does this mean for the covered call writer? At the very least it means increased liquidity and higher open interest, which translate into smaller spreads and easier fills. Both are good things when trading.

But it also means that more people are trading options, including covered calls. Large institutional investors are increasing their option trading, but so are smaller independent investors. With treasuries and highly rated bonds not paying much, everyone is searching for higher yield. Along with dividends, call premium is a logical choice.

Covered calls are (1) easy to understand (see Tutorial), (2) can be used by a variety of investors in different ways (see Conservative vs Aggressive), and (3) can be used to make money in different kinds of markets (up, slightly down, and sideways).

If you own stocks or ETFs and you're not doing covered calls then you are leaving money on the table every month. Why not get started earning income today?

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